Harvard's Robert Eccles and Jay Lorsch find the debate over whether the public company model can offer anything to the legal industry far from settled

Nearly every law firm today is organised as a private partnership, or something similar. In most countries this is required by laws that prohibit law firms from having external shareholders on a public or private basis. The fundamental reason for this is, because law is a profession, lawyers have an obligation to put their clients' interests ahead of their economic self-interest. Of course, legal work must be properly compensated to ensure a return to the firm and short-term economic sacrifices in serving a client can have large longer-term benefits in terms of future work because of the client loyalty that is generated. Having external shareholders, the argument goes, creates a potential conflict of interest between clients' needs and shareholders' needs. However, external shareholders can provide capital for growth. Since this has historically not been available in the legal profession, the industry is highly fragmented and comprised of a large number of relatively small firms in every country. And there are only a handful of practices – Clifford Chance, DLA Piper and Linklaters – that come close to being global law firms.

In a few countries, however, it is now possible for law firms to raise capital, in either the public or private markets. In the UK, of course, this is happening through the Legal Services Act of 2007, which also makes it possible to have people who are not lawyers, such as consultants, be owners in the firm. Legislation passed in 2001 in the Australian state of New South Wales, permitted law firms to be public companies, and in 2007 Slater & Gordon became the world's first publicly-traded law firm. There is so little experience here that it is hard to know what the long-term implications of this will be, and experience in other professions is limited and inconclusive. For example, auditing firms are all private and the major IT outsourcing firms are all public. However, search firms have created a kind of 'natural experiment'. Two of the big five are public companies (Heidrick & Struggles and Korn Ferry) and the others are private (Egon Zehnder, Russell Reynolds and Spencer Stuart). In conversations with partners at these firms, and in other conversations we have had with partners in other professions, we have found that no consensus exists about which capital structure is preferable. In fact, in some cases, the same argument is given in favour of both structures.

The arguments in favour of a public company capital structure are the same for law firms in general. Through the public markets the firm can raise capital to make long-term investments that exceed current cash flows or credit lines. Stock also provides a currency for making acquisitions and can be used in incentive schemes. These incentives that grow in value over time create a longer-term perspective. Having to issue public financial statements on a periodic basis and having a board of directors that must include some number of independent members are argued to lead to better corporate governance and more disciplined management.

Yet, the counterargument seems equally compelling. External shareholders' interests may not be aligned with those of equity-owning partners, who some think have a longer-term view. Short-term earnings pressures from external shareholders can also interfere with serving clients in the most professional way. For example, in executive search a position might be filled to earn the fee to meet short-term targets even though the candidate is not the best one available. More generally, being a public corporation creates tremendous pressures for growth which can inhibit being selective about clients and serving them well. Finally, critics say that becoming a public corporation destroys the culture of partnership and makes it harder to recruit top people who want to be professionals and ultimately partners, not employees.

Those who favour the private partnership argue that it actually enables a longer-term view since partners are not subject to quarterly or bi-annual earnings pressure. The absence of earnings pressure from outside shareholders also enables the firm to be more selective about its clients. Since the owners are partners, there is a complete alignment of owners and professional interests. Private partnerships engender a 'partnership culture' and attract the most capable professionals. They also have lower costs of compliance and governance.

Here too there is merit to the counterargument. Some see partners as having a very short-term view who want to maximise their current annual compensation and who have little concern for the well-being of the partnership after they are retired. Thus they are not inclined to make long-term investments. Private partnerships are also at risk due to limited capital. And with few outside directors – usually none – firm governance is weak. The result is poor succession planning and failure to recognise significant shifts in the market.

We have oversimplified the pros and cons of each capital structure. But this analysis clearly illustrates that there is a real debate around governance. Proponents of both claim their choice of capital structure leads to a longer-term view, whereas detractors claim the opposite. Empirically testing this will be difficult and in any case will require a larger number of public law firms. The question of which capital structure is associated with better corporate governance is equally complex. There is no denying the value of outside directors, but there is also no denying the increased compliance costs of being a public company. But capital structure is not the only determinant of time frame and quality of corporate governance. Both are something that senior executives or partners should be actively managing through all the choices they make.

Robert Eccles is a senior lecturer of business administration and Jay Lorsch is the Louis Kirstein professor of human relations at Harvard Business School.